The Indian stock market is currently witnessing a long-overdue correction amid probably the worst earnings cycle going into Diwali that will test the strong flows of new investors, according to Nirmal Bang's Rahul Arora.
"I think this was long overdue; there was a certain reality check that was required in the market," the chief executive officer of Nirmal Bang Institutional Equities told NDTV Profit in a televised interview on Monday.
The fundamental earnings growth was never supporting where the valuations were in the first place, Arora said. "This is probably the worst earnings cycle that we have seen going into Diwali in a long, long time."
"What is very evident is that the rural economy is in a mess." Hindustan Unilever Ltd. coming with 2–3% volume growth, a low number from two-wheeler manufacturers, and even certain consumer discretionary companies are taking a bit of a knock, he said.
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The biggest earnings growth over the last 10 years has come in because of margin expansion and, over the last five years, balance sheet deleveraging. From this point forward, the focus is entirely on topline growth, but he noted that there appears to be a lack of visibility in this area. "The market is now adjusting to the new reality."
Arora still doesn't think that the markets are going to fall off a cliff. "Somewhere around 22,000, we will find a floor on the Nifty 50," he said. However, the move to 26,000 will "be a very challenging one".
A lot of investors who have come in for the first time post-Covid have not seen a correction, Arora said. New retail investors have just seen the Nifty go from 7,500 to 26,500, and this (correction) will be new for them, he said. "Flows will certainly be tested."
A lot of defence, infrastructure, and PSU stocks were bought by retail and high-net-worth investors. It will be interesting to see how they move hereon as all of these results are stacked up in the second half of the earnings season, Arora said.
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Markets are cutting in line with earnings cuts, and there is a "method to the madness", Arora said. "People who are pricing in extrapolated growth thinking that it will keep getting better. But the reality check has hit."
If the three major pillars—banks, FMCG, and information technology—don't push the benchmarks higher, it will be difficult to present a compelling argument for the Nifty to rise, he stated.
Global funds have sold stocks worth over Rs 1.25 lakh crore since Sept. 27, according to provisional data from the National Stock Exchange. Domestic institutions have been net buyers of shares worth Rs 1.20 lakh crore during the same period.
The Nifty corrected by 8.8% from the recent peak, while the mid- and small-cap indices corrected by 7.3% and 4.5%, respectively, from their recent peaks.
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